Under-Insurance on replacement cost estimates or valuations

Published On

Oct 10, 2023

Drawing on my extensive 35 years in the property and construction industry, I've come across numerous instances where insured parties have leaned on bank valuations or online calculators to determine the sum insured for their commercial buildings.

Bank valuations, designed to be conservative to safeguard the valuation company, pose a unique challenge. They typically encompass both the building and land, whereas insurance requires only the replacement cost of the building, excluding the land.

In a recent valuation I scrutinised, the bank's value which stood at $1,500,000, while the replacement cost for the 10,000 m2 building was a substantial $12,000,000. Imagine the perplexity of explaining such a gap to an insured party post a significant loss.

For those in this business it's imperative to be aware of this issue. Requesting a distinct section in bank valuations explicitly indicating the value for insurance purposes or explicitly stating that the provided value is not intended for insurance can provide crucial clarity. This not only shields property owners from the common mistake of using these valuations for insurance but also opens doors to additional business for those providing insurance valuations.

Accurately determining insurance replacement costs requires a keen eye for precision and a comprehensive understanding of construction insurance intricacies. While insurance brokers may not possess the expertise of valuation professionals, conducting thorough checks is crucial, especially when assigned values seem disproportionately low. It's essential to question the basis of the estimate or valuation and whether it has been recently validated.

Bank valuations present one side of this challenge, but relying on the depreciated book value of an asset, often done by insured parties or their accountants, can significantly underestimate its value. So, in the dynamic landscape of property and construction, let's navigate these challenges with insight and precision to ensure the right coverage for your assets.

Moreover, the prevalence of underinsurance remains a significant concern in business interruption insurance. My colleagues and I routinely provide insurance valuations for insured parties, brokers, and insurers.

To request a quotation, please go to our website: www.quantumqs.com.au or send an email to info@quantumqs.com.au.

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